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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 000-25365
UNITED PAN-EUROPE COMMUNICATIONS N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands 98-0191997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fred. Roeskestraat 123, P.O. Box 74763
1070 BT Amsterdam, The Netherlands 1070 BT
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (31) 20-778-9840
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
American Depository Shares each representing one ordinary share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, computed by reference to the last sales price of such stock, as
of the close of trading on March 26, 1999 was $1,764.6 billion.
The number of shares outstanding of the Registrant's common stock as of
March 26, 1999 was:
129,246,223 ordinary shares, including
shares represented by American Depository Receipts
UNITED PAN-EUROPE COMMUNICATIONS N.V.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
Table of Contents
-----------------
Page
Number
------
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 36
Item 3. Legal Proceedings.............................................. 37
Item 4. Submission of Matters to a Vote of Security Holders............ 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 39
Item 6. Selected Financial Data........................................ 40
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 42
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...... 63
Item 8. Financial Statements and Supplementary Data.................... 66
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 105
PART III
Item 10. Directors and Executive Officers of the Registrant............. 106
Item 11. Executive Compensation......................................... 110
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 114
Item 13. Certain Relationships and Related Transactions................. 115
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 119
PART I
Item 1. Business
--------
(a) General Development of Business
- --- -------------------------------
United Pan-Europe Communications N.V. owns and operates cable-based
communications networks in ten countries in Europe and in Israel. We provide
cable television services. Some of our systems also provide telephone and
Internet access services. Our systems together have the largest number of
subscribers of any group of broadband communications networks operated across
Europe. We have systems in The Netherlands, Austria, Norway, Belgium and France.
These systems are strategically located in the capital cities of Amsterdam,
Vienna, Oslo, Brussels and suburban Paris. We also have systems in Israel, Malta
and Eastern Europe. We are a subsidiary of United International Holdings, Inc.,
a leading international provider of video, telephone and data services.
We operated from July 1995 to December 1997 as a 50/50 joint venture between
UIH and Philips. At the formation of the joint venture in July 1995, Philips
contributed to us, among other things, its majority interests in cable
television systems in Austria and Belgium, and its minority interests in cable
television systems in France, called Citecable, Germany and The Netherlands,
called KTE. UIH contributed to us its minority interests in cable television
systems in Hungary, Ireland, Israel, Malta, Norway, Spain and Sweden, and its
majority interest in the Czech Republic and Portugese systems, and $78.2 million
in cash, including accrued interest. UIH also issued to Philips $50.0 million of
UIH common stock. In addition, Philips received convertible notes of UPC
totalling $133.6 million to make up the difference in values between the assets
contributed by UIH and the assets contributed by Philips.
On December 11, 1997, we and UIH acquired the 50% of our ordinary shares held
by Philips. As part of this acquisition, we purchased 3.17 million shares of
Class A Common Stock of UIH held by Philips and we and UIH purchased all of our
convertible notes back from Philips. Following this acquisition and until our
initial public offering in February 1999, we became essentially a wholly-owned
subsidiary of UIH, other than approximately 7.7% of our stock held by a
foundation to support our stock option plans to employees.
Since formation, we have developed largely through acquisitions. Our major
acquisitions have included:
. a 50% interest in the A2000 system in the City of Amsterdam and four
surrounding municipalities in July 1995;
. the remaining 96.2% of the KTE system located in Eindhoven, The
Netherlands, in September 1995;
. increasing our interest in Norkabel (Norway) from 8.3% to 100%, Kabelkom
(Hungary) from 3.9% to effectively 50% and the Swedish system from 2.1% to
25.9% in September 1996;
. all of the Janco cable system in Oslo in two parts in January 1997 and
November 1998;
. 100% of the Combivisie cable television systems in the region surrounding
our KTE system in The Netherlands, effective January 1, 1998;
. various interests in Hungarian cable television systems in June 1998,
resulting in a 79.25% interest in Telekabel Hungary, Hungary's largest
cable television operator;
. 100% of the Telekabel Beheer cable television system in the Netherlands in
two parts in August 1998 and February 1999;
. an additional 23.3% and 25.0% interests in our Israeli and Maltese
systems; and
. interests in various programming companies.
We have also sold our unconsolidated interests in certain cable television
systems in France (Citecable), Germany, Spain, Sweden and Ireland, and our
consolidated interest in Portugal.
1
We believe the European telecommunications market offers significant growth
opportunities. Most European Union member countries and Norway had opened their
telephone industries to competition by January 1, 1998. This liberalization
means that new providers can offer telephone and other telecommunications
services. Due to this change in regulation and technological advances, a single
cable link to the home can deliver video, telephone and Internet/data services.
We can now offer all three services as an integrated package in the markets
where we have upgraded our network. We have already begun to do so in some
markets.
We plan to offer local telephone services, called Priority Telecom in our
Austrian, Dutch, French and Norwegian systems. We use the name Nedpoint for
these services in A2000, the Amsterdam system. A2000 has offered cable telephone
services since July 1997. In November 1998, we launched cable telephone service
on a trial basis in Vienna and in March 1999 in suburban Paris and in Oslo.
We have launched in Austria, Belgium, The Netherlands and Norway a service
giving high-speed access to the Internet through cable modems. Cable modem
technology can provide Internet access at speeds up to 100 times faster than
traditional modems using telephone lines.
Since 1994, we have been upgrading our Western European cable television
infrastructure. When we upgrade, we replace parts of the coaxial cable with
fiber optic lines and upgrade the remaining coaxial cable so that it can send
signals both to and from the customer's home. By December 31, 1998, the upgraded
parts of our networks in Austria, Belgium, The Netherlands and France passed
about 60% of the 2.6 million homes passed by those networks.
(b) Financial Information About Industry Segments
We own and operate cable television, telephone, Internet/data services and
programming operations in various foreign countries. For financial information
concerning such business segments, see the footnotes to our financial statements
included in Item 8 "Financial Statements and Supplementary Data."
(c) Narrative Description of Business
We own and operate cable-based communications networks in ten countries in
Europe and in Israel. We provide cable television services. Some of our systems
also provide telephone and Internet access services. Today, our systems, taken
together, have the largest number of subscribers of any group of broadband
communications networks operated across Europe.
The diagram below summarizes our operations and equity ownership percentages
in our operating systems on December 31, 1998. In February 1999, we bought from
UIH 33.5% of IPS, a group of programming companies focusing on the Spanish- and
Portuguese-speaking markets. We also purchased the 49% that we did not own of
our Dutch holding company, United Telekabel Holding, in February 1999. We
recently agreed to buy 95.63% of the 156,000 subscriber, Slovakian system, based
in Bratislava and surrounding cities, and expect to close this purchase by the
end of the second quarter of 1999. We also recently agreed to buy the French
cable assets from Time Warner. These French systems are located in suburban
Paris and Lyon, and in Limoges. The number of homes passed and subscribers is
210,000 and 64,000 respectively. We expect to close this purchase in the third
quarter of 1999.
2
- ---------------------------------------------------------------
United Pan-Europe Communications N.V.
- ---------------------------------------------------------------
Operating Systems Business Lines
Consolidated Unconsolidated
Systems Systems
Austria The Netherlands 51% Video Distribution and
Telekabel Group 95% United Telekabel Programming Services
Holding
Belgium 100% Telephony Services
TVD A2000 50% Priority Telecom
Norway 100% CNBH Telekabel 100% Internet/Data Services
Janco Multicom Beheer chello broadband
France 99.6% Israel Tevel 46.6%
Mediareseaux
Malta Melita 50%
Cable
Eastern Europe
Hungary: Telekabel - 79.25%
Monor - 44.75%
Czech Republic - 100%
Romania - 51-100%
Slovak Republic - 75-100%
Summary Operating and Financial Data
In the tables below, we show the percentage we own of our operating systems,
as well as operating and financial information for those systems for each of the
last two years. When we refer to information as ''UPC equity in'' we mean that
we have multiplied the statistic for each operating system by our percentage
ownership of that system. Some of our percentage ownerships of operating systems
have changed since the date of this table. In February 1999 we increased our
ownership of UTH to 100% and A2000 to 50%.
3
Summary Operating Data 1998
The operating data set forth below reflects the aggregate statistics of the
operating systems in which the Company has an ownership interest.
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Homes in Two way
Service Homes Homes Basic Basic
Area Passed Passed Subscribers Penetration
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 578,500 572,936 386,109 529,067 92.3%
The Netherlands (UTH) (1). 943,027 914,737 484,133 867,800 94.9%
Austria................... 1,073,297 900,350 516,700 454,957 50.5%
Hungary (Telekabel
Hungary) (2)............. 901,500 510,622 - 442,567 86.7%
Israel.................... 595,000 575,976 363,819 402,355 69.9%
Norway.................... 529,924 463,235 15,803 323,387 69.8%
Belgium................... 133,000 133,000 91,735 127,398 95.8%
Malta..................... 179,000 162,996 - 70,363 43.2%
Romania................... 180,000 98,174 - 61,999 63.2%
Czech Republic............ 229,531 151,716 - 54,153 35.7%
Hungary (Monor) (3)....... 85,000 68,339 - 30,623 44.8%
France.................... 150,O00 74,623 74,623 29,107 39.0%
Slovak Republic........... 67,959 37,641 - 21,044 55.9%
--------- --------- --------- ---------
Total................ 5,645,738 4,664,345 1,932,922 3,414,820
--------- --------- --------- ---------
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
UPC UPC UPC
UPC Equity in Equity in Equity in
Paid-in Homes in Homes Basic
Ownership Service Area Passed Subscribers
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 25.5% 147,518 146,099 134,912
The Netherlands (UTH) (1). 51.0% 480,944 466,516 442,578
Austria................... 95.0% 1,019,632 855,333 432,209
Hungary (Telekabel
Hungary) (2)............. 79.3% 714,439 404,668 350,734
Israel.................... 46.6% 277,270 268,405 187,497
Norway.................... 100.0% 529,924 463,235 323,387
Belgium................... 100.0% 133,000 133,000 127,398
Malta..................... 50.0% 89,500 81,498 35,182
Romania................... 51.0-100.0% 165,300 84,209 51,282
Czech Republic............ 100.0% 229,531 151,716 54,153
Hungary (Monor) (3)....... 44.8% 38,080 30,616 13,719
France.................... 99.6% 149,400 74,325 28,991
Slovak Republic........... 75.0-100% 62,499 33,380 18,209
--------- --------- ---------
Total................ 4,037,037 3,193,000 2,200,251
--------- --------- ---------
4
Summary Operating Data 1998 (continued)
As at December 31, 1998
--------------------------------------------------------------------
Subscribers Lines Served
---------------------------- -----------------------------
Residential Businesses Residential Businesses
----------- ---------- ----------- ----------
Telephony
The Netherlands (A2000)
(4)...................... 18,111 3 19,850 830
The Netherlands (UTH) (1)
(5)...................... 20,500 72 20,500 -
Hungary (Monor) (3)....... - - 69,244 -
----------- -------- ----------- --------
Total................... 38,611 75 109,594 830
=========== ======== =========== ========
Dataservices
The Netherlands (A2000)... 8,128 253 n/a n/a
The Netherlands (UTH) (1). 3,379 - n/a n/a
Austria................... 9,054 603 n/a n/a
Norway.................... 768 - n/a n/a
Belgium................... 1,869 284 n/a n/a
----------- -------- ----------- --------
Total................... 23,198 1,140 n/a n/a
----------- -------- ----------- --------
As at December 31, 1998
-----------------------------------------------------------------------
UPC UPC UPC UPC
UPC Equity in Equity in Equity in Equity in
Paid-in Residential Business Residential Business Lines
Ownership Subscribers Subscribers Lines Served Served
--------- ----------- ----------- ------------ --------------
Telephony
The Netherlands (A2000)
(4)...................... 25.5% 4,618 1 5,062 212
The Netherlands (UTH) (1)
(5)...................... 51.0% 10,455 37 10,455 -
Hungary (Monor) (3)....... 44.8% - - 30,987 -
----------- ----------- ------------ --------------
Total................... 15,073 38 46,504 212
=========== =========== ============ ==============
Dataservices
The Netherlands (A2000)... 25.5% 2,073 65 n/a n/a
The Netherlands (UTH) (1). 51.0% 1,723 - n/a n/a
Austria................... 95.0% 8,601 573 n/a n/a
Norway.................... 100.0% 768 - n/a n/a
Belgium................... 100.0% 1,869 284 n/a n/a
----------- ----------- ------------ --------------
Total................... 15,034 922 n/a n/a
----------- ----------- ------------ --------------
5
Summary Financial Data 1998 (6)
At
For the twelve months period ending December, 31, 1998 December
------------------------------------------------------------------------------ 31,
Cash flows from 1998
Net ---------------------------- -------
Operating Net Adjusted Capital Oper- Invest- Long-
Income/ Income/ EBITDA Expend- ating ing Financing Term
Revenue (loss) (loss) (7) itures Activies Activies Activities Debt
--------- --------- ------- -------- ------- -------- -------- ---------- -------
(Dutch guilders, in thousands)
The Netherlands (A2000)... 123,622 (39,980) (64,890) 32,022 114,308 55,52 110,574 48,550 467,430
The Netherlands (UTH) (1). 99,122 (9,636) (49,374) 29,854 121,384 (1,853) 141,092 130,326 232,727
Austria................... 177,151 1,523 (9,322) 81,012 82,501 73,410 62,223 (28,924) 213,503
Hungary (Telekabel
Hungary) (2)............. 27,706 1,650 132 9,989 13,386 13,912 19,495 9,919 29,381
Israel.................... 304,533 66,715 9,416 168,238 61,107 87,595 583,660 497,953 531,427
Norway.................... 92,671 (32,291) (67,124) 33,048 51,193 9,353 51,163 21,711 134,515(8)
Belgium................... 36,782 (8,817) (15,276) 13,263 19,759 29,996 30,487 (56) -
Malta..................... 30,010 5,862 1,868 11,337 21,387 14,705 21,387 8,592 46,223
Romania................... 4,161 1,454 609 1,905 1,153 423 1,289 1,076 -
Czech Republic............ 8,909 (10,668) (6,871) (1,887) 1,041 (5,469) 1,384 7,307 -
Hungary (Monor)........... 35,647 14,659 3,939 22,551 9,892 17,121 13,117 5,350 78,540
France.................... 8,058 9,620 (13,163) (5,077) 52,394 3,377 52,486 50,245 40,334(9)
Slovak Republic........... 1,652 (3,068) (3,758) (1,736) 5,663 (709) 10,689 11,567 -
6
Summary Operating Data 1997
The operating data set forth below reflects the aggregate statistics of the
operating systems in which the Company has an ownership interest.
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Homes in Two way
Service Homes Homes Basic Basic
Area Passed Passed Subscribers Penetration
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 572,000 565,740 125,180 518,160 91.6%
The Netherlands (KTE)..... 98,393 95,442 90,000 90,671 95.0%
Austria................... 1,064,000 890,305 339,900 435,859 49.0%
Hungary (Kabelkom)........ 300,000 290,690 - 266,775 91.8%
Israel.................... 360,000 350,392 350,392 241,874 69.0%
Norway.................... 529,924 457,551 5,171 319,654 69.9%
Ireland (Princes Holdings) 355,000 350,989 - 136,160 38.8%
Belgium................... 133,000 133,000 27,600 127,529 95.9%
Malta..................... 179,000 153,917 - 58,033 37.7%
Romania................... 150,000 69,620 - 40,188 57.7%
Czech Republic............ 271,100 145,650 - 51,571 35.4%
France.................... 86,000 28,267 28,267 6,758 23.9%
Slovak Republic........... 36,239 22,193 - 18,476 83.3%
--------- --------- --------- ---------
Total................ 4,134,656 3,553,756 966,510 2,311,708
--------- --------- --------- ---------
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
UPC UPC UPC
UPC Equity in Equity in Equity in
Paid-in Homes in Homes Basic
Ownership Service Area Passed Subscribers
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 50.0% 286,000 282,870 259,080
The Netherlands (KTE)..... 100.0% 98,393 95,442 90,671
Austria................... 95.0% 1,010,800 845,790 414,066
Hungary (Kabelkom)........ 50.0% 150,000 145,345 133,388
Israel.................... 23.3% 83,880 81,641 56,357
Norway.................... 87.3% 462,624 399,442 279,058
Ireland (Princes Holdings) 20.0% 71,000 70,198 27,232
Belgium................... 100.0% 133,000 133,000 127,529
Malta..................... 25.0% 44,750 38,479 14,508
Romania................... 90.0-100.0% 143,000 67,498 39,428
Czech Republic............ 100.0% 271,100 145,650 51,571
France.................... 99.6% 85,656 28,154 6,731
Slovak Republic........... 75.0-100% 30,779 18,030 14,987
--------- --------- ---------
Total................ 2,870,982 2,351,539 1,514,606
--------- --------- ---------
7
Summary Operating Data 1997 (continued)
As at December 31, 1997
-------------------------------------------------------------
Subscribers Lines served UPC
----------------------- ----------------------- Paid-in
Residential Businesses Residential Businesses Ownership
----------- ---------- ----------- ---------- ---------
Telephony
The Netherlands (A2000)............ 3,222 33 3,473 56 50.0%
----------- ---------- ----------- ----------
Total............................ 3,222 33 3,473 56
=========== ========== =========== ==========
Data Services
The Netherlands (A2000).......... 450 -- n/a n/a 50.0%
Austria.......................... 1,177 21 n/a n/a 95.0%
Norway........................... 129 4 n/a n/a 87.3%
Belgium.......................... 214 42 n/a n/a 100.0%
----------- ---------- ----------- ----------
Total.......................... 1,970 67 n/a n/a
----------- ---------- ----------- ----------
As at December 31, 1997
-------------------------------------------------------------
UPC UPC UPC UPC
Equity in Equity in Equity in Equity in
Residential Business Residential Business Lines
Subscribers Subscribers Lines Served Served
----------- ----------- ------------ -------------------
Telephony
The Netherlands (A2000).......... 1,611 17 1,737 28
----------- ----------- ------------ -------------------
Total.......................... 1,611 17 1,737 28
=========== =========== ============ ===================
Data Services
The Netherlands (A2000).......... 225 -- n/a n/a
Austria.......................... 1,118 20 n/a n/a
Norway........................... 113 3 n/a n/a
Belgium.......................... 214 42 n/a n/a
----------- ----------- ------------ -------------------
Total.......................... 1,670 65 n/a n/a
----------- ----------- ------------ -------------------
8
Summary Financial Data 1997
For the twelve months period ending December 31, 1997
---------------------------------------------------------------
Net Net
Operating Income/ Adjusted Capital
Revenue Income/(loss) (loss) EDITDA(7) Expenditures
------- ------------- ------- --------- ------------
(Dutch guilders, in thousands)
The Netherlands (A2000)..................... 101,450 (17,083) (24,008) 33,763 120,242
The Netherlands (KTE)....................... 20,669 2,156 (1,549) 12,719 7,953
Austria..................................... 162,783 16,928 (10,718) 80,508 59,913
Hungary (Kabeikom).......................... 32,717 11,660 2,806 14,857 11,213
Israel...................................... 215,031 56,256 32,217 117,738 33,988
Norway...................................... 91,529 (27,885) (74,649) 37,099 20,647
Ireland (Princes Holdings).................. 70,229 7,646 (4,867) 25,527 18,903
Belgium..................................... 38,738 (3,869) (11,465) 14,596 11,584
Malta....................................... 23,099 4,363 358 9,755 6,364
Romania..................................... 2,192 1,049 595 1,359 857
Czech Republic.............................. 7,492 (13,116) (21,591) (6,730) 4,214
France...................................... 2,526 (5,933) (7,125) (4,472) 22,809
Slovak Republic............................. 1,547 (1,826) (1,366) (1,011) 2,799
For the twelve months At December 31,
peiod ending December 31, 1997 1997
-------------------------------------------------
Cash flows from
---------------------------------- Long-
Operating Investing Financing Term
Activities Activities Activities Debt
---------- ---------- ---------- ----------
(Dutch guilders, in thousands)
The Netherlands (A2000)..................... 33,304 (119,824) 60,000 426,000
The Netherlands (KTE)....................... 4,207 (8,441) 3,505 81,769
Austria..................................... 79,133 (83,070) 19,850 245,000
Hungary (Kabeikom).......................... 10,973 (11,213) (854) -
Israel...................................... 78,364 (35,276) (43,091) 13,270
Norway...................................... 12,083 (20,830) 30,703 148,948
Ireland (Princes Holdings).................. 15,321 18,894 2,960 139,243
Belgium..................................... (6,127) 26,473 (22,080) -
Malta....................................... (3,449) (6,275) 4,431 38,325
Romania..................................... 1,232 (1,012) (192) -
Czech Republic.............................. (13,608) (2,293) 14,563 -
France...................................... (4,171) 23,049 25,596 -
Slovak Republic............................. (2,594) (3,863) 6,396 -
9
(1) UTH was founded in August 1998. The 1998 financial information in the
tables covers the period from inception through December 31, 1998.
(2) Telekabel Hungary was founded on June 30, 1998. The 1998 financial
information in the tables covers the period from inception through December
31, 1998.
(3) Our Monor service offers traditional telephone service.
(4) A2000 offers cable telephony service.
(5) UTH's 80% subsidiary Uniport offers a carrier select telephony service.
(6) Financial information has been prepared in accordance with Dutch GAAP.
(7) "Adjusted EBITDA" represents earnings before net interest expense, income
tax expense, depreciation, amortisation, stock based compensation charges,
minority interest, share in results of affiliated companies (net), currency
exchange gains (losses) and other non-operating income (expense) items.
Industry analysts generally consider Adjusted EBITDA to be a helpful way to
measure the performance of cable television operations and communications
companies such as us. We believe Adjusted EBITDA helps investors to assess
the cash flow from our operations from period to period and thus to value
our business. Adjusted EBITDA should not, however, be considered a
replacement for net income, cash flows or for any other measure of
performance or liquidity under generally accepted accounting principles, or
as an indicator of a company's operating performance. We are not entirely
free to use the cash represented by our Adjusted EBITDA as we please.
Several of our consolidated operating companies are restricted by the terms
of their debt arrangements. Each company has its own operating expenses and
capital expenditure requirements, which can limit our use of cash. Our
presentation of Adjusted EBITDA may not be comparable to statistics with a
similar name reported by other companies. Not all companies and analysts
calculate EBITDA in the same manner.
(8) Excludes intercompany debt amounting to NLG234,044.
(9) Excludes intercompany debt amounting to NLG45,100.
10
UPC Video Services: Video Distribution and Programming
Video Distribution Overview
We own and operate established cable television systems and are constructing
new systems. At December 31, 1998, our operating systems had approximately 3.4
million subscribers to their basic tier video services. Video distribution
services accounted for approximately 92.7 % of our consolidated revenue in 1998.
An average of 73.2% of the homes passed by our systems subscribe to our basic
tier video services. We offer our subscribers some of the most advanced analog
video services available today and a large choice of FM radio programs. In
addition, because many of our operations are two-way capable, we have been able
to add more services. In many systems, for example, we have introduced impulse
pay-per-view services, which enable subscribers to our expanded basic tier to
select and purchase programming services, such as movies and special events,
directly by remote control.
Video Programming Overview
Popular programming is another key factor for increasing our video services
revenue. We believe it will also be a potential source of additional revenue
from sales to other cable television operators and satellite companies in
Europe. We have enhanced our existing, and are continuing to develop and acquire
new ownership interests in, programming services.
We are involved in several country-specific programming ventures including
creating channels for Israel and Malta. Together, these programming ventures
have developed channels in key genres including sports, children, documentary
and movies, which are subtitled or dubbed in the local language.
We recently acquired UIH's 75% interest in Tara and its 33.5% interest in
IPS. Tara provides Irish general entertainment programming to the U.K. markets.
IPS produces a movie channel, a documentary channel, a children's channel and a
music channel for the Spanish and Portuguese markets. As of December 31, 1998,
Tara and IPS sold programming content to non-UPC cable operators serving an
aggregate of approximately 1.7 million subscribers.
UPC Telephone Services: Priority Telecom
Overview
We believe that our existing customer base and upgraded network give us a
unique opportunity to provide telephone service in Europe. We plan to offer
local telephone services, called Priority Telecom in our Austrian, Dutch, French
and Norwegian systems. We call our local telephone services Nedpoint in the
A2000 systems. We also plan to develop national and international long distance
voice and data services. Our operating companies are licensed to provide
telephone services in Austria, France, Hungary, The Netherlands and Norway.
A2000 began offering cable telephone services in July 1997 on a trial basis
in Purmerend, a town outside Amsterdam, and since then has begun to offer these
services to its customers in Hilversum, Zaanstad and part of Amsterdam. In
November 1998, we launched Priority Telecom's cable telephone service on a trial
basis in Vienna and in March 1999 in our Mediareseaux system in suburban Paris
and in Oslo, Norway.
We are negotiating to connect our local fiber networks, primarily through
interconnections and capacity leases with other new telecommunications service
providers, to provide long-distance telephone services across several European
markets.
Interconnect Agreements
A2000 and KPN have entered into an interconnect agreement covering all of
A2000's homes and businesses passed that will be capable of receiving telephone
service. Similarly, each of Telekabel Wien, Janco Multicom, UTH and Mediareseaux
has completed an interconnect agreement with the national incumbent
telecommunications
11
service provider covering all of their homes and businesses passed by cable in
their networks. Even with interconnect arrangements secured, we may still
experience difficulty operating under them. In our A2000 system, for example,
quantity at the interconnection have lowered the quality of A2000's telephone
service. In Austria, while Telekabel Wien secured the interconnect arrangement
with the support of the Austrian telecommunications regulator, the Austrian
incumbent telecommunication operator is challenging the arrangement in the
Austrian courts.
Roll-Out and Implementation Schedule
Cable telephone service in The Netherlands to areas outside of the A2000
systems will be provided by UTH. The rollout for these areas is scheduled to
begin during the second half of 1999. Priority Telecom launched its service on
a trial basis in Vienna in November 1998, and in suburban Paris and Oslo, in
March 1999. It intends to launch service to business and residential areas in
Vienna passing approximately 100,000 homes in early 1999. Priority Telecom's
service is scheduled to be rolled out in Vienna to an additional 500,000 homes
during the first half of 1999, with plans to offer the service to the balance of
the approximately 83,000 remaining homes passed in Vienna capable of receiving
the service by the end of 1999.
Traditional Telephone System
In addition to our cable telephone operations, our recently acquired Monor
system has offered traditional telephone services since December 1994 and as of
December 31, 1998, had approximately 69,240 traditional telephone lines. UTH's
80% subsidiary Uniport offers a carrier select telephone service and had
approximately 20,500 subscribers at December 31, 1998.
Competition
Priority Telecom will face competition in its markets from incumbent
telecommunications operators and other competitive operators that have
substantially more experience in providing, and significantly greater resources
devoted to, telephone services. In addition, we will depend on interconnect
arrangements provided by incumbent telecommunications operators. We believe,
however, that our strategy for Priority Telecom will allow us to compete
effectively with incumbent telecommunications operators and any other local loop
providers who subsequently enter the market.
UPC Internet/Data Services: High Speed Access and chello broadband
Overview
We have launched a cable modem-based, high speed Internet access service in
Austria, Belgium, The Netherlands and Norway. The launch of chello broadband in
our upgraded Western European markets is scheduled to begin during the first
quarter of 1999. As of December 31, 1998, we had approximately 23,200
residential and more than 1,140 business cable modem Internet access
subscribers.
Internet Access Experience To Date
We have launched a residential and business cable modem-based, high-speed
Internet access service in Austria, Belgium, The Netherlands and Norway. We have
marketed our current Internet service as a high speed Internet access product
excluding many of the value-added services that chello broadband expects to
provide. Marketing efforts for our Internet access service have been limited to
date but we intend to implement a more substantial brand marketing program from
the launch of chello broadband's service.
Roll-Out and Implementation Schedule
The launch of chello broadband in our upgraded Western European markets is
scheduled to begin during the first quarter of 1999.
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Competition
The Internet services business in Europe is highly competitive. We believe,
however, that our strategy for chello broadband, which encompasses competitive
pricing and superior service combined with high speed access and compelling
content, will mitigate the effects of competition from other Internet service
providers in its markets. We currently compete with traditional dial-up Internet
service providers and other providers (including many incumbent
telecommunications service providers) and expect that chello broadband will face
competition from other broadband cable modem service providers, such as @Home
and Roadrunner as they move to the European market. In the future, we expect
competition from providers using other broadband technologies.
Operating Companies
We have operations in 10 countries in Europe and in Israel. While they all
offer a basic video service, their other services vary. We are also currently
upgrading the network in some countries but not in others.
Austria: Telekabel Group
Overview. We own 95% of the Telekabel Group, which provides communications
services to the Austrian cities of Vienna, Klagenfurt, Graz, Baden and Wiener
Neustadt and is the largest video distribution system in Austria with over 40%
of the market. Telekabel Group's largest subsidiary, Telekabel Wien, which
serves Vienna and represents approximately 87% of Telekabel Group's total
subscribers, owns and operates one of the larger clusters of cable systems in
the world in terms of subscriber numbers served from a single headend.
We are expanding Telekabel Group's service offerings as its network is
upgraded to full two-way capability. The upgraded network enabled Telekabel
Group to launch an expanded basic tier, impulse pay-per-view services and
Internet/data services in 1997. Telekabel Group was the first Austrian cable
television company to offer tiered and pay-per-view services when it launched
such services in Vienna.
Telekabel Group launched an Internet access service in September 1997 and had
approximately 9,050 Internet access subscribers as of December 31, 1998, with
current average additions of 1,300 customers per month. It plans to introduce
the chello broadband service in 1999. In addition, Telekabel Group launched
Priority Telecom's cable telephone service in Vienna on a trial basis in
November 1998. Following intervention of regulatory authorities on behalf of
Telekabel Group, Telekabel Group entered into an interconnect arrangement with
PTA, the incumbent telecommunications service operator, in November 1998.
Network. Telekabel Group owns the complete cable television infrastructure
for each of its systems from the headend to the home. In early 1992, Telekabel
Wien initiated the rebuild and upgrade of its existing cable network in Vienna.
The upgrade, which is expected to be 75% complete by the end of 1999, was
approximately 57% complete and passed approximately 516,700 homes as of December
31, 1998.
Programming. Telekabel Group offers basic subscribers 32 channels of cable
programming, including substantially all of the broadcast channels from Austria
and Germany, as well as CNN, Super Channel, MTV, an informational channel, Tips
and Hits, Telekino Heute and Vienna cable text. Telekabel Group launched an
expanded basic tier in May 1997 by providing subscribers, whose homes are passed
by the upgraded network, an advanced analog decoder box, the cost of which is
provided for in the monthly rate. The expanded basic tier currently provides
seven channels of additional programming. In conjunction with the launch of
this tier, Telekabel Group launched an impulse pay-per-view service with up to
ten channels of programming.
Competition. Telekabel Group's cable systems compete with a direct to home
satellite service that is available throughout Austria. Currently, direct to
home satellite service penetration of the Austrian market is approximately 35%
and is concentrated primarily in the rural areas of the country. There is less
competition from direct to home satellite service in Vienna where we estimate
that the penetration is approximately 8%. Competition in the Internet/data
business in Austria is intensifying. PTA, the national incumbent
telecommunications service provider,
13
is promoting its high speed lines and a number of other companies recently have
entered, or are expected to enter, the market. Upon launch of its telephone
service in Vienna, Telekabel Group began competing with PTA. New facilities-
based competitors in Telekabel Group's operating areas include United Telekom
Austria, Tele.ring and Citykom. In addition, there are three wireless telephone
providers in Telekabel Group's operating areas.
Belgium: Radio Public N.V./S.A.
Overview/Growth Strategy. TVD, our 100% owned subsidiary, provides cable
television and communications services in selected areas of Brussels and nearby
Leuven in Belgium. We estimate that there are currently approximately 133,000
homes under license in TVD's franchise areas. TVD, which currently has 96%
penetration, plans to grow through the introduction of new services that
currently are not subject to the price regulations applicable to basic cable
services.
TVD introduced expanded basic tier in October 1996 and an Internet access
service in September 1997. As of December 31, 1998, TVD had approximately 4,900
expanded basic subscribers and 1,869 residential and 284 business Internet
access subscribers. TVD plans to launch the chello broadband service in April
1999. As TVD upgrades additional portions of its network to full two-way
capability, it plans to introduce impulse pay-per-view in the second quarter of
1999. We are exploring the possibility of providing cable telephone services.
Network. TVD owns the complete cable television infrastructure for each of
its systems from the headend to the home, with the exception of Etterbeek, with
15,000 subscribers, where TVD has an agreement with the municipality to operate
the network until at least 2016. In late 1996, TVD began upgrading its network
through fiber optic overlay of its trunk lines and replacement of all
amplifiers. TVD's upgraded networks passed approximately 91,735 homes, or 69%
of its total network as of December 31, 1998. TVD expects to complete this
upgrade by mid-1999.
Programming. TVD offers in Brussels a basic tier consisting of 32 channels,
17 expanded basic programs in six tiers, 20 FM radio channels and 20 premium
digital radio channels. Its system in Leuven offers a basic tier consisting of
37 channels, an expanded basic tier with six channels, 20 FM radio channels and
20 premium digital radio channels. TVD also distributes five premium channels,
three in Brussels and two in Leuven, which are provided by Canal+.
Competition. TVD has approximately 96% penetration in its market. TVD faces
competition, however, from one other cable television provider, Iverlek, which
was granted a license for the provision of cable television services in Leuven
and is constructing a cable network. As of December 31, 1998, TVD had
approximately 27,480 subscribers in Leuven. To date, TVD has experienced only
limited competition from direct to home satellite service providers. In its
Internet access business, TVD competes with traditional dial-up Internet service
providers. Also, we understand that in Leuven, Telenet will offer a broadband
access and content service using Iverlek's new cable network.
The Netherlands: United Telekabel Holding (UTH)
Our Dutch operations are held through UTH, an unconsolidated subsidiary, of
which we hold 51% as of December 31, 1998. In February 1999, we acquired the
remaining 49% of UTH. UTH holds three principal operating companies: CNBH,
which holds the combined KTE and Combivisie systems, Telekabel Beheer, both of
which it wholly owns, and A2000, of which it owns 50%. MediaOne owns the other
50% of A2000. UTH does not consolidate the results of A2000. UTH owns and
operates systems in the regions of Brabant, Flevoland, Friesland and Gelderland.
Because of the large number of current subscribers located in four large
clusters in The Netherlands, UTH is constructing a fiber backbone to
interconnect its region-wide networks. In September 1998, UTH acquired 80% of
Uniport, a carrier select telephone service with approximately 20,500
subscribers at December 31, 1998.
Overview. Both KTE and Combivisie introduced an expanded basic tier in
December 1996. KTE and Combivisie were combined into CNBH in 1998, which then
launched impulse pay-per-view services in June 1998.
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UTH intends to launch chello broadband's Internet/data services in the CNBH
systems in early 1999. In addition, UTH plans to introduce the initial phase of
cable telephone services in the NV Telekabel systems in mid-1999. Telekabel
Beheer introduced an Internet access service in November 1997 in parts of its
networks and also delivers a business telephone service, including leased line
management, on-site services and telephone equipment, to its former 100%
shareholder, NUON, and several other companies. As part of the purchase
agreement with NUON for the remaining 49% of UTH, UTH and NUON have agreed to
enter into a preferred supplier arrangement through December 31, 2007, whereby
UTH will be the preferred supplier for NUON and its subsidiaries for
telecommunications and Internet services and NUON will be the preferred supplier
to UTH for energy and energy-related services.
In August, 1998, UTH acquired from Nutsbedrijf Regio Eindhoven a 16,700
subscriber cable television system in the Eindhoven region. This acquisition
enabled us to increase the cluster of operations in and around the Eindhoven
area.
In January 1999, UTH acquired the networks of Geldrop and St. Oedenrode and
sold the network of Schijndel to Palet Kabelcom. The main reason was a further
improvement of operations through clustering.
Network. Each of UTH's systems owns or has the right to use the complete
cable television infrastructure from the headend to the home. In 1997,
Combivisie and Telekabel Beheer began upgrading their networks. The upgrade is
expected to be 89% completed by year-end 1999. As of December 31, 1998,
approximately 53% of UTH's homes were passed by the upgraded network.
Programming. UTH currently offers its subscribers an average of 28 channels
of basic programming along with a music channel and 33 FM radio channels. UTH
also distributes two premium channels provided by Canal+. In addition, UTH
offers an impulse pay-per-view service, consisting of four movie channels and
one adult channel. UTH's basic service includes Dutch broadcasting channels, as
well as a variety of German, French and English channels. The eight channels in
UTH's expanded basic tier consist of sports, travel, news, science fiction,
music and general entertainment. UTH is discussing with some of its higher value
programming suppliers the migration of their channels from the basic tier to the
expanded basic tier. UTH is not certain when it will successfully conclude these
discussions.
Competition. UTH is the only cable system in its franchise area. To date, UTH
has maintained approximately 94% penetration. Competition from television
signals received by antenna, direct to home satellite services and local private
cable systems has been limited. In its Internet access business, UTH will
compete with dial-up Internet service providers such as KPN's World
Access/Planet Internet, NLNet and World Online. Upon launch of telephone
services, UTH will compete primarily with KPN.
The Netherlands: A2000 Holding N.V.
Overview. A2000, a 50/50 joint venture between UTH and MediaOne, currently
enjoys basic penetration rates of approximately 92% in its two systems that
serve Amsterdam and its surrounding communities of Landsmeer, Purmerend,
Zaanstad and Ouder-Amstel, and Hilversum.
A2000 launched a nine-channel expanded basic tier in October 1996, impulse
pay-per-view services in April 1997, cable telephone service on a trial basis in
July 1997 and an Internet/data access service in October 1997. A2000 launched
its Nedpoint-branded cable telephone service in August 1998. As of December 31,
1998, A2000 had approximately 14,250 subscribers to its expanded basic tier,
approximately 18,100 cable telephone subscribers and approximately 8,125
residential and 250 business subscribers to its Internet/data access service.
Whereas penetration of our expanded basic tier service is approximately 4%, it
increased to more than 20% if offered in combination with a telephony
subscription. The same trend shows up for internet services: if offered in
combination with a telephony subscription, penetration of internet is higher
than 10%, whereas it is 3% on a stand alone basis. We plan to use the
information gathered from our telephone experience in A2000 as we launch cable
telephone services in our other primary markets.
15
Network. A2000 owns its infrastructure from the head end to the home and is
in the process of upgrading its cable television infrastructure. As of December
31, 1998, approximately 386,100 homes, or 67% of A2000's systems, were passed by
the upgraded network, with total rebuild expected to be completed by the end of
1999.
Programming. A2000 currently offers 26 channels of cable programming and 39
FM radio channels to its basic tier subscribers in the A2000 systems. A2000
offers programming in many languages, including Dutch, English, German, Italian,
French and Turkish.
A2000's expanded basic tier carries 13 channels. Programming includes both
ethnic content, such as Asian, Chinese and Arabic, and thematic content, such as
science fiction, travel, music, adult and art. A2000 has moved some popular
channels, including MBC and the National Geographic Channel, from the basic tier
service to the expanded basic tier. A2000 also distributes two premium channels
provided by Canal+. Canal+ has recently commenced litigation against A2000
demanding direct access to A2000's network in order to introduce its own digital
decoder. We do not believe A2000 will be obliged to provide the access demanded
by Canal+ and, even if it were, we do not believe providing such access would
have a material effect on A2000's business.
Increases in the price of the basic tier service are restricted by agreements
between A2000 and Amsterdam and the other municipalities in its franchise areas.
Because these prices are kept at a low level, A2000's basic tier revenues are
limited. A2000, therefore, charges programming suppliers carriage fees for the
transmission of their channels. Some of A2000's programming suppliers have been
unwilling to pay such carriage fees and Discovery, Eurosport, CNN and MTV have
withdrawn their channels from A2000's basic tier offering. A2000 has offered to
include these channels in its expanded basic tier or in separate mini-tiers.
While A2000 has experienced typical and anticipated customer dissatisfaction
with the change of programs in the basic tier, it has not experienced additional
churn that can be directly attributed to these changes.
A2000 plans to continue to introduce new channels on its tiered services when
such programming is available. A2000's impulse pay-per-view service offers
movies from all major studios on four movie channels. This service also includes
an adult channel and one ''barker'' channel that provides previews of upcoming
pay-per-view events.
Competition. A2000 currently has a penetration rate of approximately 92% in
its service area. Its primary competition is from direct to home satellite
service providers. To date, however, A2000's programming rights, low basic cable
fees, restrictive regulations on the installation of dishes and high
installation costs have limited direct to home satellite services as a
meaningful competitor. In its Internet access service, A2000 currently is the
only high speed access provider in its operating area. A2000 expects to compete
with KPN, which is testing a high speed Internet access service, in the near
future. A2000 also competes with traditional dial-up providers, including KPN's
World Access/Planet Internet, NLNet and Euronet. In its telephone business,
A2000 currently competes with KPN, Telfort and Worldcom. A2000 is competing on
the basis of price and the ability to integrate a number of its services.
Norway: Janco Multicom
Overview. Janco Multicom is Norway's largest cable television operator with
approximately 47% of the total Norwegian cable television market as of December
31, 1998. Janco Multicom owns and operates 16 cable television systems in
Norway located primarily in the southeast and along the southwestern coast, as
well as its main network in Oslo. The well-established Norwegian cable
television market has 70% penetration, as of December 31, 1998, primarily due to
poor over-the-air reception in much of Norway and a significant demand for
television entertainment.
Janco Multicom launched an Internet access service in March 1998 and plans to
introduce the chello broadband service in the first quarter of 1999. Janco
Multiplan has secured a telephony license agreement from the Norwegian
regulator, and an interconnection agreement with TeleNor, the incumbent telecom
operator. We plan to introduce Priority Telecom's cable telephone service in
1999 in the upgraded portions of Janco Multicom's network.
Network. Janco Multicom owns the complete cable television infrastructure for
each of its systems from the headend to the home, except for cable and plant
located on housing association property, which is legally owned by
16
the housing association. Janco Multicom is currently upgrading its network to
full high capacity 860 MHz two-way capability, with the exception of 75,000
homes in western rural areas. Its networks vary in capacity from 300 MHz to 550
MHz . This varying architecture requires us to replace more of the network than
in our other primary markets, thereby increasing the costs of this upgrade. The
upgrade, which began in April 1998, is scheduled to be completed over the next
three to four years.
Programming. Janco Multicom currently offers subscribers 31 channels of
programming in four tiers:
. basic, including ''must carry'', a limited number of broadcast channels
required by the government to be carried,
. an expanded basic tier,
. a ''mini-tier'' of certain selected channels, and
. premium services.
Because English is widely understood in Norway, Janco Multicom is able to use
English-language programming to supplement the limited, but increasing, supply
of available Scandinavian-language programming.
Competition. Janco Multicom experiences limited competition from direct to
home satellite service providers. In its Internet access business, Janco
Multicom expects to compete with TeleNor, the Norwegian incumbent
telecommunications operator, which is expected to launch a broadband Internet
access service this fall; and Tele2, a subsidiary of NetCom Systems, which
operates a dial-up Internet access service and has recently launched a high
speed wireless Internet access service. With Priority Telecom telephone
services, Janco Multicom will also compete in this area with TeleNor.
Israel: Tevel Israel International Communications Ltd.
Overview/Growth Strategy. Tevel has exclusive cable television broadcasting
franchises for the entire Tel Aviv metropolitan area, the region of Ashdod-
Ashkelon, which is 30 miles south of Tel Aviv, and the Jezreel Valley, which is
80 miles northeast of Tel Aviv. We own 46.6% of Tevel. In April 1998, Tevel
acquired 100% of Gvanim Cable Television Ltd. and has since integrated fully
Gvanim's operations with its own. Gvanim and its 90%-owned subsidiary Gvanim-
Krayot operate cable television systems in the Rishon-Leziyon, Ramla-Lod,
Modiin, Haifa Bay, Karmiel, Maalot and Lower Galilee areas of Israel. There are
approximately 212,150 homes passed in the Gvanim franchises and as of December
31, 1998, Gvanim and its subsidiary had approximately 149,650 subscribers. The
Gvanim acquisition increased Tevel's total subscribers as of December 31, 1998
to more than 402,350 in franchise areas representing over 595,000 homes, or
approximately 40% of the total homes in Israel.
In addition to its cable operations, Tevel owns 50% of Globcall, a
telecommunications company that designs, installs and maintains switching
systems for businesses. As of December 31, 1998, Globcall served approximately
35,000 outlets. Tevel also owns 33% of Netvision, one of Israel's leading
Internet service providers that had over 60,000 dial-up subscribers as of
December 31, 1998.
Network. Tevel owns the complete cable television infrastructure for each of
its cable systems from the headend to the home. The systems' construction
incorporates 550 MHz capability, representing approximately 50 channels, with a
60 MHz return path providing approximately 363,800 homes passed with two-way
capability for impulse pay-per-view services only. Tevel plans to upgrade all of
its systems to 750 MHz hybrid fiber coaxial technology capable of providing
cable telephone and Internet/data services. Currently, Gvanim's network is a
one-way system with a substantial overlay of fiber optic backbone, but it is
being upgraded to full two-way capability with the installation of 750 MHz
hybrid fiber coaxial technology. Tevel expects that the upgrade of all of its
systems will be substantially complete by mid-1999.
Programming. Tevel offers basic subscribers 45 channels of programming,
including a wide range of entertainment, news, sports, performing arts and
educational channels, as well as five pay-per-view channels in all of Tevel's
areas. Currently, over 40% of Tevel's subscribers purchase at least one pay-per-
view buy per month. Tevel has applied to extend its license to provide pay-per-
view services in all of its franchise areas. Tevel has also
17
applied for a license to provide pay-per-view services in Gvanim's franchise
areas. The grant of such licenses may be conditional upon Tevel and Gvanim
obtaining their programming from independent third parties. As explained below,
their programming is currently provided by an affiliate.
Tevel and the other Israeli cable television operators own a programming
company, I.C.P. Israel Cable Programming Company Limited. ICP purchases
programming rights for subsequent sale to cable television operators in Israel
and produces two cable-exclusive channels: a general entertainment channel and a
movie channel. A children's channel, a sports channel and a channel showing
nature, science and art documentaries are produced by third parties.
Competition. Because Tevel has exclusive cable television licenses, to date
it has experienced no competition from other multi-channel television providers.
The Israeli government recently passed legislation, however, to grant licenses
to direct to home satellite service operators. In January 1999, a license has
been granted to a group led by Bezeq, the Israeli incumbent telecommunications
service provider, and another license may be granted to a second group. These
operators are expected to begin providing direct to home satellite services by
the forth quarter of 1999. ICP may be required to sell to direct to home
satellite service operators its channels that are currently offered exclusively
to cable television operators, and Tevel may be required to divest off its
ownership in ICP.
France: Mediareseaux Marne, S.A.
Overview. We have a 99.6% ownership interest and a 95% economic interest in
Mediareseaux Marne S.A., which currently holds cable television franchises for
150,000 homes in the Marne-la-Vallee area east of Paris. Mediareseaux began
construction of its network in September 1996, and as of December 31, 1998,
Mediareseaux's system passed approximately 74,620 homes and had approximately
29,100 basic subscribers, giving it a penetration rate of 39.0%. Mediareseaux
began offering pay-per-view services in May 1998, and to date, the pay-per-view
buy rate is approximately 0.5 movies per expanded basic tier subscriber per
month.
We recently agreed to buy the French cable assets from Time Warner. These
French systems are located in suburban Paris and Lyon, and in Limoges. The
number of homes passed and subscribers is 210,000 and 64,000 respectively. We
expect to close this purchase in the third quarter of 1999.
In July 1998, Mediareseaux obtained a 15 year telephone license for an area
that includes 1.5 million homes in the eastern suburbs of Paris and in September
1998, Mediareseaux began installing a telephone switch. Mediareseaux has
begun offering telephone services in February 1999 within its cable television
franchise area and has obtained frequencies for a trial offering of fixed
wireless local loop services. Mediareseaux also plans to offer chello
broadband's Internet access services in 1999. To expand its operations,
Mediareseaux is pursuing potential acquisition opportunities and plans to
develop these franchises as one clustered system offering integrated video,
cable telephone and Internet/data services.
Network. Mediareseaux owns the complete cable television infrastructure for
each of its cable systems from the headend to the home. The hybrid fiber coaxial
network was started with a 750 MHz UHF-VHF frequency band network with a 5-65
MHz return path. The systems' post-1998 construction incorporates 860 MHz hybrid
fiber coaxial capacity with a 5-65 MHz return providing full two-way capability.
As of December 31, 1998, Mediareseaux's network passed approximately 50% of
the 150,000 homes then in its franchise areas. We expect the network to pass all
150,000 homes in our current franchise areas by the end of 2000.
Programming. Mediareseaux's current programming offers:
. a basic eight-channel package containing off-air, local and promotional
programs,
. four extended basic tiers, called News & Current Events, Youth &
Discovery, International Channels and Sports & Leisure, with five to nine
channels each,
. three premium tiers containing three children's channels, three sports
channels and four movie channels, and
. ten impulse pay-per-view channels.
18
Competition. Mediareseaux competes with other video service providers in
its license areas including satellite providers such as Canal Satellite and TPS.
Mediareseaux expects to face competition mainly from France Telecom, the
French incumbent telecommunications operator and Cegetel with the launch of its
cable telephone services. Upon the launch of its Internet access service,
Mediareseaux expects to face competition from France Telecom's Wanadoo
service, Cegetel, which now includes AOL, Compuserve and HOL, and Infonie, among
others.
Malta: Melita Cable TV P.L.C.
Overview. Melita Cable TV P.L.C. operates an exclusive franchise network in
Malta. Currently, we and Melita Cable Holdings each own 50% of Melita. As of
December 31, 1998, Melita passed approximately 163,000 homes and had 70,363
basic video subscribers representing a 43.2% penetration rate. Melita's growth
strategy is to continue to market aggressively its service to homes in its
franchise areas, as well as to provide more programming to increase its appeal
to subscribers.
Network. Melita owns the complete cable television infrastructure from the
headend to the home. Currently, Melita passes over 163,000 homes, or 91% of the
network. The upgrade to high capacity 860 MHz two-way capability, which has been
initiated this year and is expected to be completed by 2000, will enable Melita
to provide Internet access and other enhanced services.
Programming. Melita currently provides 52 channels of programming, grouped in
three tiers:
. reception, which includes local and foreign off-air channels that are
received with an antenna and retransmitted over the cable network,
. basic, which includes reception service plus nine additional satellite
services that are received with a satellite dish and retransmitted over the
cable network, and
. TV Plus (reception and basic services plus nine additional satellite
services).
Because English is spoken in Malta by over 90% of the population, Melita is
able to take advantage of the abundant supply of English language programming
available for licensing. In 1996, Melita created a ''live'' sports channel
showing English Premier League Football and in 1997, introduced a second
''live'' sports channel featuring Italian soccer, as well as four other new
channels. In August 1998, Melita combined the features into a full-time sports
channel, which includes other sports events and local productions.
Competition. With the exception of a small number of home satellite receivers
and a few hotel private cable installations, competition in Malta is limited
primarily to approximately 15 Italian and Sicilian broadcast channels.
Hungary: Telekabel Hungary
Overview. In June 1998, we increased our interest in Kabelkom, Hungary's
largest operator of cable television systems, from 50% to 100%. Shortly
thereafter, Kabelkom combined operations with Kabeltel, Hungary's second largest
operator of cable television systems, creating Telekabel Hungary, in which we
retain a 79.25% interest. As of December 31, 1998, Telekabel Hungary had
approximately 442,560 subscribers. There are no current plans to launch
telephone or Internet/data services in Telekabel Hungary's systems.
Network. Telekabel Hungary, together with two local minority partners for
two systems, owns the complete cable television infrastructure for each of its
systems from the headend to the home. We are upgrading these networks. As of
December 31, 1998, approximately 86,000 customers were already served by the
rebuilt network. The upgraded network throughout Budapest will be 750 MHz hybrid
fiber coaxial technology with 65 MHz return path. As of December 31, 1998,
Telekabel Hungary's network passed approximately 105,100 homes with hybrid fiber
coaxial cable.
Programming. Telekabel Hungary offers subscribers four tiers of programming
comprising approximately 35 channels:
19
. basic tier, which includes a limited number of broadcast and satellite
channels required by the government to be carried,
. an expanded basic tier, and
. a premium service, HBO-Hungary.
Approximately 15 channels, including HBO-Hungary, are available in Hungarian. In
the Telekabel Hungary systems, 75% of all subscribers passed by the upgraded
network take the expanded basic tier package.
Competition. Telekabel Hungary currently averages over 84% penetration in its
service area and faces limited competition. We understand, however, that
potential competitors may begin to offer direct to home satellite services in
Budapest.
Hungary: Monor
Monor, our Hungarian operating company in which we own a 44.75% economic
interest, has offered traditional telephone services since December 1994. Monor
has 85,000 homes in its franchise area, with approximately 84,000 traditional
telephone homes passed and approximately 68,340 cable television homes passed.
It served approximately 69,240 traditional telephone access lines and
approximately 30,620 cable television subscribers as of December 31, 1998.
Czech Republic
Overview. We own 100% of KabelNet, its Czech Republic subsidiaries that
provide cable and ''wireless'' cable television services in the cities of Prague
and Brno, the Czech Republic's second largest city. At December 31, 1998, the
wireless cable system served approximately 44,275 subscribers in both cities and
the cable system served approximately 9,875 subscribers in Prague. KabelNet's
penetration rate was 35.7% as of December 31, 1998. There are no current plans
to launch telephone or Internet/data services in KabelNet's systems.
Network. KabelNet's systems currently offer programming over an MMDS network
and a hybrid fiber coaxial cable network. KabelNet owns the complete cable
system infrastructure for each of its systems from the headend to the home.
KabelNet has no plans to introduce two-way services to its network at this time.
Programming. The Czech wireless cable systems offer subscribers three tiers
of programming comprising approximately 16 channels:
. five "must carry" channels,
. a 15-channel basic tier, which includes the ''must carry'' channels, and
. one premium channel, HBO-Czech.
Approximately nine channels, including HBO Czech, are available in Czech/Slovak.
Currently, approximately 13% of KabelNet's cable subscribers take the expanded
basic tier package.
Competition. KabelNet faces competition in its service area. Currently, parts
of its service areas have been overbuilt by Cable Plus, a subsidiary of US WEST,
and Dattel Kabel in Prague and Cable Plus in Brno. Overbuilding is when a cable
network is installed where one already existed.
Romania
Overview. We are currently involved in the development of three cable
companies in Romania:
. our 100%-owned Control Cable Ventures, with operations in Ploiesti and
Slobozia,
. our 100%-owned Multicanal Holdings, located in Bucharest, Romania's
capital, and
. our 51%-owned Eurosat in Bacau.
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Since 1993, when we first entered the Romanian market, we have widened our
customer base through acquisition and marketing activities in conjunction with
build out. As of December 31, 1998, our combined Romania operations passed
approximately 98,175 homes and served approximately 62,000 subscribers,
representing a penetration rate of 63.2%. There are no current plans to launch
telephone or Internet/data services in the Romanian systems.
Network. In 1994, we initiated an intensive upgrade of our Romanian systems
to rebuild the network from 300 MHz to 550 MHz. In Bacau, it will be 750 MHz.
The rebuild in Ploiesti, which has 24,000 subscribers, is complete. The rebuild
in Slobozia and Bacau, which together have 30,000 subscribers, is expected to be
completed by 2000. The Romanian systems have no plans to introduce two-way
services at this time.
Programming. The Romanian systems offer subscribers one to three tiers of
programming with approximately 28-34 channels:
. basic tier,
. an expanded basic tier, and
. a premium service, HBO Romania.
HBO Romania was launched in Ploiesti and Bucharest in February and April
1998, respectively. We also launched an expanded basic tier in Ploiesti in April
1998. Approximately 12 channels, including HBO Romania, are available in
Romanian. Currently, 15.5% of the basic tier subscribers take the expanded basic
tier package.
Competition. Because there are no exclusive franchises awarded in Romania, we
face competition in all four franchise areas in which we operate. While there is
little overbuild within the cities, the homes are divided among a variety of
competitors in each city. Including our systems, there are three operators in
Ploiesti, four operators in Bacau, two operators in Slobozia and eight major
operators in Bucharest.
Slovak Republic
Overview. We entered the Slovakian market in 1995 and currently have over
67,950 homes in our franchise areas. We are developing projects in the cities of
Trnava, Zvolen, Nove Zamky and Levice. We own 75% of our projects in Trnava and
100% of our projects in Zvolen and Levice. Construction of the network in Trnava
and Nove Zamky have been completed. The cities of Zvolen and Levice are all
currently under construction, which is expected to be completed by the end of
1999. As of December 31, 1998, our Slovakian operations passed approximately
37,640 homes and served approximately 21,040 subscribers, representing a
penetration rate of 55.9%. There are no current plans to launch telephone or
Internet/data services in the Slovakian systems.
We recently agreed to buy 95.63% of the 156,000 subscriber system, that is
based in Bratislava and surrounding cities. We expect to close the purchase in
the course of the second quarter of 1999.
Network. The Slovakian systems own the hybrid fiber coaxial cable network
from the headend to the home. There are no plans to introduce two-way services
to the Slovakian systems' network at this time.
Programming. The Slovakian systems offer subscribers three tiers of
programming on approximately 34 channels:
. a basic tier,
. an expanded basic tier, and
. a premium service, HBO Czech.
Approximately 12 channels, including HBO Czech, are available in Slovak/Czech.
Currently, 90.9% of the subscribers take the expanded basic tier package.
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Competition. In the cities of Levice and Nove Zamky, there are no competitors
to our systems. In Zvolen, there are two competitors. One is an unencrypted
wireless cable service operated by Cable Plus, a subsidiary of US WEST, and the
other is a small private cable operator. Trnavatel faces no direct competition.
Employees
As of December 31, 1998, we, together with our consolidated subsidiaries, had
approximately 1,500 employees. We believe that our relations with our employees
are generally good.
Certain of our operating subsidiaries, including our Austrian, Dutch and
Norwegian systems, are parties to collective bargaining agreements with some of
their respective employees.
Corporate Ownership Structure
We own 100% of our operating systems in Norway, Belgium and the Czech
Republic. In February 1999, we increased our ownership of UTH to 100%. Below
is a description of those operating systems in which we hold less than 100%.
Austria
Telekabel Group consists of five Austrian corporations, each of which owns a
cable television operating system. We own 95% of, and manage, each Telekabel
Group company. Each of the respective cities in which the operating systems are
located owns, directly or indirectly, the remaining 5% interest in each company.
Telekabel Wien's 5% shareholder Kabel-TV-Wien Gesellschaft m.b.H is owned by
the City of Vienna. KTV has the right to appoint a member to Telekabel Wien's
supervisory board. If four to six members have been appointed by shareholder
resolution, KTV has the right to appoint two members. KTV also has the right to
appoint one member of Telekabel Wien's board of management. We have appointed
six members of the supervisory board and two members of the board of management.
KTV has appointed two members of the supervisory board and one member of the
board of management. The remaining four members of the supervisory board are
employee representatives. Under the agreements among Telekabel Wien and KTV,
decisions regarding the subscriber rates and programming content of Telekabel
Wien's basic subscription package require the unanimous approval of Telekabel
Wien's board of management. Although we believe the cooperation between KTV's
managing director and the other managing directors has been successful in the
past, there can be no assurance that the board of management will unanimously
approve decisions regarding the subscriber rates and programming content of its
basic subscription package. Should the Board not reach a unanimous decision in
respect of these matters, then pursuant to the Syndicate Agreement, a
shareholders meeting can be called. We, as a 95% shareholder, can call that
meeting and decide on the agenda. Under Austrian law, a majority shareholder
such as us may generally take a decision at a shareholders meeting rather than
through the Board of Management. However, we as a majority shareholder have
never taken this action and do not anticipate doing so in the future.
In connection with the UPC Acquisition in December 1997, KTV and Philips
agreed that Philips will continue to guarantee the capital level to be
maintained by Telekabel Wien. Philips has also agreed to guarantee the continued
fulfillment of the agreements that were originally concluded between KTV and
Philips and that were assigned by Philips to us. We have agreed to indemnify
Philips for any liability under Philips' guarantee.
Philips, KTV and ourselves have agreed that the agreements concluded between
KTV and Philips will run until December 31, 2022 with an option to extend them.
Due to its position as a guarantor, Philips has the right to appoint one
member to our Supervisory Board. This Supervisory Director has a veto right that
is limited to fundamental decisions and exceptional business matters, such as
the sale or disposition of our interests in Telekabel Wien, if certain threshold
values are met.
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The articles of association of the companies in the Telekabel Group restrict
their shareholders from divesting their interests for periods ranging from the
end of 2009 to 2022. In addition, a sale of shares requires notice of two years
and is subject to a right of first refusal of the other shareholders.
The City of Vienna's approval is required for any change of control over us,
which approval cannot be unreasonably withheld if the buyer is a reputable
telecommunications and/or cable television operator. In the absence of such
approval, the City of Vienna can require UIH to own Telekabel Wien separately
from us. See "Certain Transactions and Relationships".
We may provide Priority Telecom's services to Telekabel Group's subscribers
through a wholly-owned subsidiary, even though the services will continue to be
marketed by Telekabel Group.
The Netherlands (A2000)
UTH and MediaOne International, an international developer and manager of
cable television, telephone and wireless communications properties, each own 50%
of the ordinary share capital of A2000. A2000 owns 100% of Kabeltelevisie
Amsterdam B.V., which operates cable systems in Amsterdam, Landsmeer, Purmerend,
Zaanstad and Ouder-Amstel, and 100% of A2000 Hilversum B.V., which operates a
cable system in Hilversum. The Municipality of Amsterdam owns one priority share
in Kabeltelevisie Amsterdam, which gives the municipality the right to block the
merger, demerger, dissolution and liquidation of Kabeltelevisie Amsterdam,
certain amendments to Kabeltelevisie Amsterdam's articles of association, the
issue of Kabeltelevisie Amsterdam shares to persons other than A2000, the
appointment of a legal entity as a managing director and the granting of voting
rights to a pledgee of A2000's shares of Kabeltelevisie Amsterdam. Furthermore,
the Municipality of Amsterdam's approval is required for any change of control
over A2000. Approval cannot be withheld if the buyer is a reputable
telecommunications and/or cable television operator or financial institution.
A2000, Kabeltelevisie Amsterdam and A2000 Hilversum are each managed by a
management board, responsible for day-to-day management, under the supervision
of a non-executive supervisory board. The supervisory boards of A2000 and A2000
Hilversum consist of an even number of directors: one half are appointed upon
binding nomination from MediaOne and one half are appointed upon binding
nomination from UTH. Certain major decisions require approval by at least 75% of
the shareholders. Kabeltelevisie Amsterdam's supervisory board consists of three
directors, one appointed by each of MediaOne, UTH and the municipality. The
Kabeltelevisie Amsterdam and A2000 Hilversum management boards consist of at
least one managing director (the chief executive officer), appointed by UTH, and
a chief financial officer, appointed by MediaOne, as well as other members
appointed by both. The A2000 management board consists of an even number of
directors, currently two, one appointed by UTH and one appointed by MediaOne.
Certain major decisions affecting Kabeltelevisie Amsterdam, such as approval of
business plans and annual budgets, require approval of the majority of the
supervisory board of Kabeltelevisie Amsterdam.
A2000 is a 50/50 joint venture that requires the agreement of both owners for
certain management decisions. From time to time, there has been disagreement
between its owners as to some of the operations of A2000. We do not believe,
however, that A2000's operations or prospects have been materially affected by
these disagreements.
France
We own 99.6% of Me'diare'seaux, our French operating system. The other owner
of Me'diare'seaux is an entity controlled by Patrick Drahi, its founder and
current chairman, which holds warrants giving it the right to purchase for a
nominal amount new shares corresponding to 4.6% of Me'diare'seaux's share
capital. Accordingly, we have only a 95% economic interest in Me'diare'seaux.
Pursuant to an agreement dated June 16, 1998, we and the entity controlled by
Patrick Drahi have granted to each other options to purchase and sell, at a
price based on fair market value, the shares of Me'diare'seaux that the entity
may hold in the future.
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Israel
We currently own indirectly 46.6% of Tevel, our Israel operating system. We
acquired 23.3% of this interest in November 1998. An Israeli corporation owned
by DIC Communication and Technology Ltd. and PEC Israel Economic Corporation and
whom we call the ''Discount Group'' owns 48.4% of Tevel and a private Israeli
investor holds the remaining 5% of Tevel.
Tevel is managed by a board of directors. We have the right to designate one
of Tevel's five directors for each 17% of Tevel that we own. Currently, two
Tevel directors are our appointees. Each of Tevel's shareholders has agreed to
grant a right of first refusal to the other shareholders in the event of a
transfer of any Tevel shares. If the other shareholders do not exercise this
right, they are permitted to participate in the sale and may require the selling
shareholder to include in the transferred shares such number of shares equal to
each shareholder's pro rata amount.
In addition, any shareholder of Tevel that holds more than a 30% interest may
offer its shares to the other shareholders at a price based upon the appraised
fair market value of Tevel. If the other shareholders do not accept the offer,
the offering shareholder may require that all of the shares of Tevel be sold to
a third party at the appraised value. Any such sales would be conditioned on
receipt of appropriate regulatory and other consents. If a third party has not
agreed to purchase the Tevel shares at the appraised value within six months of
the date the appraisal is delivered to Tevel and the shareholders, the right to
exercise the forced buyout option lapses, and any shareholder that thereafter
desires to exercise the forced buyout option must first offer to sell its shares
to the other shareholder at fair market value based on a new appraisal. No
shareholder may exercise this forced buyout option more than once in any 12-
month period. Neither party has exercised the forced buyout option. We and the
Discount Group have agreed not to exercise this forced buyout option while our
loan from DIC is outstanding.
Tevel's shareholders, other than the private Israeli investor, have agreed
not to compete with Tevel in respect of certain cable telecommunications
services and complementary businesses in Israel unless the Tevel board of
directors decides that Tevel will not participate in such systems or businesses.
Malta
We currently own indirectly 50% of the ordinary share capital of Melita. The
remaining 50% is owned by Melita Cable Holdings Ltd., a Maltese company owned by
Maltese citizens, as required by Melita's franchise agreement.
The day-to-day management of Melita is vested in its board of directors.
Melita currently has nine directors of whom we appointed four, Melita Cable
Holdings appointed four and we and Melita Cable Holdings jointly appointed the
president. Certain major actions require our approval and the approval of a
majority of the directors of Melita Cable Holdings.
Neither we, Melita Cable Holdings nor our affiliates may compete with Melita
with respect to providing video signals to homes in Malta. Each of us now may
offer our interest in Melita to the other. If either of us elects not to
purchase the other's interest, we both must cooperate to sell all of Melita. If
either of us sells our interest in Melita to a third party, the one which is
selling must give the other an opportunity to sell to that third party.
Hungary
Telekabel Hungary. We and The First Hungary Fund Ltd., an investment fund,
indirectly own 79.25% and 20.75%, respectively, of the ordinary share capital of
Telekabel Hungary. Telekabel Hungary owns interests ranging from approximately
96.88% in one and 100% in seven of the eight Kabelkom systems contributed by us
and 100% in five and 99.96% in one of the Kabeltel systems contributed by The
First Hungary Fund. Our shares of Telekabel Hungary are pledged in favor of
Telekabel Hungary's DEM65.6 million bridge finance lenders.
One of our wholly-owned subsidiaries is solely responsible for day-to-day
management of Telekabel Hungary, under the supervision of Telekabel Hungary's
supervisory board. The supervisory board has four members, three of
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which are appointed by us and one by The First Hungary Fund. The parties have
agreed that the supervisory director appointed by The First Hungary Fund may
block the required supervisory board approval of any element of the business
plans and budgets of Telekabel Hungary and its subsidiaries that he reasonably
determines would decrease the shareholders' value of Telekabel Hungary to the
detriment of The First Hungary Fund while we would obtain an increase in value
other than through Telekabel Hungary or its subsidiaries. Certain major
decisions concerning Telekabel Hungary and its subsidiaries, such as the merger,
demerger, liquidation and sale of all or substantially all of the assets of
those entities, the amendment of their articles of association, and the issuance
of certain preference shares, require approval of The First Hungary Fund's
representative so long as The First Hungary Fund owns at least 10% of Telekabel
Hungary's share capital.
Moreover, we and The First Hungary Fund can dispose of our shares in
Telekabel Hungary after December 31, 1999, either to the other at fair market
value, to a third party or through a registration of such shares under the U.S.
Securities Act of 1933 or on a European exchange. The selling shareholder must
first offer its shares to the other and, if the non-selling shareholder declines
to purchase such shares, the shares may be sold to a third party on terms no
less favorable than the terms offered to the non-selling shareholder for a six-
month period after the non-selling shareholder so declines.
Monor. Monor Telefon Tarsasag Rt has the exclusive, local-loop telephone
concession for the region of Monor, Hungary. We and our partner, PenneCom B.V.,
each own about a 44.75% economic interest and about a 37.5% voting interest in
Monor. The remaining economic and voting interests are owned by several
Hungarians.
Romania
We have interests in three Romanian cable companies: indirect 100% interests
in Multicanal Holdings, SRL, located in Bucharest, and Control Cable Ventures,
SRL, with operations in Ploiesti and Slobozia, and a 51% interest in Eurosat,
with operations in Bacau. The other shareholders of Eurosat are local investors.
Slovak Republic
We operate in the Slovak Republic through two Slovak limited liability
companies: KabelTel S.R.O., and Trnavatel S.R.O. We have a 100% indirect
interest in KabelTel, and a 75% indirect interest in Trnavatel. Salko Ltd., a
Slovak corporation, owns 20% and the City of Trnava owns 5% of the remaining
interest in Trnavatel. KabelTel has operations in the cities of Zvolen, Levice
and Nove Zamky, while Trnavatel operates in Trnava.
Programming Companies
Tara. We own 80% of Tara. The remaining 20% of Tara is owned by RTE
Commercial Enterprises Ltd., an affiliate of the Irish national broadcasting
company. Tara is managed by a board of directors.
IPS. IPS is a group of three related entities, one corporation and two
partnerships, focusing on the Spanish and Portuguese markets. We hold an
approximately 33.5% interest in these entities. The other partners of IPS are a
subsidiary of The Walt Disney Corporation and entities owned by the Urbina
Group.
Regulation
The provision of video, telephone and Internet/data services in the countries
in which we operate is regulated. The scope of regulation varies from country
to country, although in some significant respects regulation in our Western
European markets is harmonized under the regulatory structure of the European
Union. Below is a summary of the regulatory environment in the European Union
and the European Economic Area member countries in which we operate and of the
regulatory environment in Israel.
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European Union
Austria, The Netherlands, Belgium and France are all member states of the EU.
As such, these countries are required to enact national legislation which
implements directives issued by the EU Commission and other EU bodies. In recent
years, the EU has led the opening of competition and the liberalization of the
telecommunications and video services sectors, which includes the use of cable
networks to provide public voice telephone and other telecommunications
services, in EU member states. Although not an EU member state, Norway is a
member of the European Economic Area and has generally implemented or is
implementing the same principles on the same timetable as EU member states. As a
result, most of the markets in which we operate have been significantly affected
by regulation initiated at the EU level. As it develops, such EU regulation will
continue to have a significant effect on these markets, including future
developments relating to the convergence of telecommunications, media and
information technology.
The EU Commission has started to review the consequences of this convergence
for the regulatory environment. This review will take place during 1999 and may
result in changes of the current regulatory framework, but the scope of such
changes cannot be predicted at this time.
Telephone and Internet/Data Services
Liberalization of Telecommunications Services and Infrastructure. A central
aim of the liberalization process has been to reduce the monopoly power of the
incumbent telecommunications operators in order to introduce competition in the
European telecommunications market. Following the EU Commission's Services
Directive (90/388/EC), dated June 28, 1990, as amended, the exclusive rights of
such incumbent operators to provide telecommunications services were gradually
removed so that competing operators and service providers would be entitled to
offer such services. The incumbent telecommunications operators invariably owned
the national networks, however, and the lack of an alternative infrastructure to
provide such liberalized services operated as a major barrier to entry into the
market by competitors. In an effort to overcome this barrier, the EU introduced
the ''Cable Television Networks Directive'' (95/51/EC), dated October 18, 1995,
which required member states to remove existing restrictions on the use of cable
television networks to provide communications services other than cable
television services. As a result, cable television operators became able to use
their networks to provide telecommunications services except for public voice
telephone. In 1996, the EU Commission issued the ''Full Competition Directive''
(96/19/EC), which required most member states to remove the exclusive rights of
incumbent public voice telephone operators by January 1, 1998. The establishment
and provision of telecommunications networks was also liberalized under this
directive. As a result of this directive, our Western European operating
companies may establish and provide telecommunications networks and/or services,
including public voice telephone and Internet/data services, through their cable
networks.
Under the Cable Television Networks Directive, telecommunications operators
that have exclusive rights to provide cable television network infrastructure in
a given area and achieve an annual turnover of more than Euro 50 million must
account separately for their telecommunications services and any cable
television services. In The Netherlands, Belgium and in certain circumstances,
Norway, this requirement applies to all telecommunications operators providing
both cable television and other telecommunications services under national law
irrespective of the above-mentioned requirements. Should any of our operating
companies in the EU with exclusive rights to cable television infrastructure
achieve the requisite turnover, they would become subject to these requirements.
A draft Directive of the EU Commission, if issued, will require member states
to enact legislation directing incumbent telecommunications operators to
separate their cable television and telecommunications operations into distinct
legal entities. This directive is likely to affect how incumbent
telecommunications operators position themselves in cable television or
broadband services by encouraging them to restructure their existing operations,
which may increase their competition with us, although the incumbent operators
do not currently compete in the cable television services market.
Interconnection. Because new telecommunications operators need to
interconnect their networks with the fixed public telephone network, the EC
Council of Ministers and the European Parliament adopted the Directive on
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Interconnection in Telecommunications (97/33/EC), which sets forth the general
framework for interconnection, including general obligations to allow other
telecommunications operators to interconnect with their networks. The directive
requires member states to impose obligations on telecommunications network
operators with significant market power (which, although it may vary, is
presumed when an operator has 25% or more of the relevant market). They must
offer interconnection without discriminating between operators, which offer
similar services, and their interconnection charges must follow the principles
of transparency and be based on the actual cost of providing the
interconnection. As a result, if the principles in the directive are fully
applied, our operating companies in the EU and Norway should be able to
interconnect with the public fixed network and other major telecommunications
networks on a cost basis in order to provide their services. There can be no
assurance, however, that we will be able to obtain from incumbent
telecommunications operators interconnection on terms and conditions or at
prices satisfactory to us without protracted negotiations or involvement in
time-consuming regulatory proceedings.
Licensing. EU telecommunications policy has also aimed to harmonize the
licensing requirements for the provision of public telecommunications services.
As a result of the ''Licensing Directive'' (97/13/EC), which became effective on
December 31, 1997, member states are required to change national legislation so
that providers of telecommunications services require either no authorization or
a general authorization which is conditional upon ''essential requirements'',
such as the security and integrity of the network's operation. Licensing
conditions must be objective, transparent and non-discriminatory. Member states
may issue individual licenses in certain situations. For example, the provision
of public voice telephone and the establishment or provision of public
telecommunication networks may be subject to individual licenses. In addition,
telecommunications operators with significant market power may be required by
member states to hold individual licenses carrying more burdensome conditions
than the authorizations held by other providers. Significant market power is
typically 25% of the relevant market.
Regulation of the Internet. Although Internet-specific regulations have not
been issued, EU policy may develop harmonized principles of ''responsibility of
content'' to apply to Internet access providers analogous to those applicable to
publishing companies. We do not expect such regulations to materially adversely
affect our Internet business plans.
Video Services
Video Services through Telecommunications Networks. Most of our operating
companies are the only cable television operators in their franchise areas. As
with the telecommunications sector, the cost of building a network to provide
video services is a considerable disincentive to potential new entrants in the
video services market. Our operating companies may face competition in the long
term in their franchise areas from new entrants providing video services through
the infrastructure of incumbent telecommunications operators and potential new
entrants. In The Netherlands, for example, where there are no restrictions on
the use of telecommunications infrastructure for the provision of cable
television services, the incumbent telecommunications operator is testing
whether it will be able to provide video services through its fixed networks.
Conditional Access. In order to enable further competition in the video
services market, the EU Commission passed the ''Advanced Television Standards
Directive'' (95/47/EC), dated October 24, 1995, which requires member states to
regulate the offering of conditional access systems, such as program decoders
used for the expanded basic tier services offered by many of our operating
companies. Providers of such conditional access systems are required to make
them available on a fair, reasonable and non-discriminatory basis to other video
service providers, such as broadcasters.
Broadcasting. The ''Television Without Frontiers Directive'' (97/36/EG),
dated June 30, 1997, is intended to introduce freedom of broadcasting in the EU.
Generally, broadcasts emanating from and intended for reception within a country
have to respect the laws of that country. Under the directive, other EU member
states will be required to allow broadcast signals to be made into their
territories so long as the broadcaster complies with the law of the originating
member state. Television advertising and sponsorship in member states will have
to comply with certain minimum rules and standards, although member states may
set more detailed and stricter rules for certain matters.
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We plan to enter into joint venture agreements with programming providers in
order to launch eight new channels in late 1999, which we intend to broadcast to
our operating companies and other cable television operators for distribution
through their networks. We understand that the Television Without Frontiers
Directive will apply to the broadcasting of these joint-venture channels to such
operating companies so that one broadcasting license within an EU member state
will permit us to broadcast such channels to cable operato